The Fractals indicator basically divides major trends into simple and predictable reversal patterns. This article will explain what fractals are and how you can apply them to your trading to increase your profits.

The original idea to create the Fractal indicator

Many people believe that markets are random. In fact, one of the best investment books available today is "A Random Walk Down Wall Street" (1973) - Burton G. Malkiel's "random walk on Wall Street", which argues that employment The return of investment funds is like the game of darts at its board.

However, many people believe that while prices can be random, in reality patterns and trends are still the way traders follow to execute their trades. One of the most basic ways that traders can identify trends is by using the Fractals tool.

What are Fractals?

When it comes to Fractals, many people think of mathematical concepts, they think of "chaos theory" (chaos theory) and other mathematical theories. Although these concepts apply to the market (it is a dynamic, non-linear system), most traders refer to fractals in a simpler sense. That is, view fractals as repeating patterns that can predict reversals between large and turbulent price actions.

These basic fractals consist of five or more candles. The rules for determining fractals are as follows:

+ Bearish fractal (bearish fractals) is the highest point in the middle of a 5-candle series.


+ Bullish fractal (upward fractals) is the middle lowest point in a 5-candle series.


The fractals shown in the figure above are two examples of perfect patterns. Note that many less perfect models are also possible, the fundamental ones should be lawful for the fractal to be highly accurate.

The obvious limitation here is that fractals are lagging indicators - that is, a fractal cannot be formed until we confirm the reversal pattern that occurred 2 candles later. While this may be true, most reversals take place in more candles, so the trend will hold for longer (as we'll see in the example below).

How to use Fractals in trading

Like other indicators in trading, Fractals work well if combined with other indicators, but perhaps the most popular is still using the "Alligator indicator" tool as a filter – a tool made up of moving averages.

The rule here is that buy signals appear below Alligator's teeth (middle MA) and sell signals appear above Alligator's teeth.


The fractals shown in the figure above are two examples of perfect patterns. Note that many less perfect models are also possible, the fundamental ones should be lawful for the fractal to be highly accurate.

The obvious limitation here is that fractals are lagging indicators - that is, a fractal cannot be formed until we confirm the reversal pattern that occurred 2 candles later. While this may be true, most reversals take place in more candles, so the trend will hold for longer (as we'll see in the example below).

How to use Fractals in trading

Like other indicators in trading, Fractals work well if combined with other indicators, but perhaps the most popular is still using the "Alligator indicator" tool as a filter – a tool made up of moving averages. 

The rule here is that buy signals appear below Alligator's teeth (middle MA) and sell signals appear above Alligator's teeth.

Here is a trading rule made on H4 frame:

  • Start trading when the price touches the farthest Fibonacci band line, but only when the daily fractal forms.
  • Exit when the daily fractal signal a reversal is formed.

Do you find fractals identify reversals very well from highs to lows? This helps you to guess which Fibonacci zone to trade - all we have to do is check when the daily fractals occur. We should note that the trend shown in the illustration will start to get stronger as it meets. bearish fractals and stops at bullish fractals. Although it took us a few pips to wait for confirmation, it would save us from the market noise - making 139 pips is certainly not too bad to hold for 3 days.

Things to note when using Fractals

They are a lagging indicator. They work best when used as confirmation of a reversal happening. When it makes tops and bottoms can be predicted by combining other techniques.

The longer the time period (i.e. the number of candles required for a fractal) the more reliable the reversal. However, you should also keep in mind that the longer the period, the fewer the number of signals.

It is best to plot fractals on multiple timeframes and use them in combination. For example, only trade in fractals in the short time frame and in the direction of the fractals in the longer time frame. Long-term fractals are more reliable than short-term fractals.

Always use fractals in combination with other indicators or with certain systems. It is a support tool, not a specifier.

Conclude

As you can see, fractals can be incredibly powerful tools when used in conjunction with other indicators and techniques, especially when used to confirm reversals. The most common usage is with the "Alligator indicator"; however, there are other uses as well, as we have seen here.

Overall, fractals are a great decision support tool for any trading strategy.